Insights

Articles & Events

Insights

Wednesday, 7 June, 2017

The New Mauritius-India DTA – Still the Best Route to India

Despite recent changes Mauritius remains the most competitive jurisdiction for investment into India. The realignment has certainly allowed India to retain more by way of taxes but the Mauritius route is far from being obsolete.

Mauritius has benefitted from rather generous terms in this DTA with India for decades. Unfortunately all good things come to an end…and it did! We have now seen the inevitable realignment of the terms of the Treaty. The benefits are still potent enough to keep Mauritius an attractive route into India but it is shared more equitably. Add to that factors like the significant experience gained in dealing with India, cultural and language synergies and even the convenient time zone, and we have the ingredients to remain a major player in the Indian market.

The investment strategy between the two long-term investment partners must now be revisited because of the introduction of GAAR and due to the amendments in the DTAA, both effective from 1 April 2017.

Mauritius entities currently enjoy a zero tax policy on capital gains on investments in the Indian market and changed as of 1 April 2017. These amendments will shift taxing rights arising on capital gains from Mauritius to India.

GAAR seeks to give the Indian authorities powers to scrutinise transactions structured in such a way as to deliberately avoid paying tax in India. Internationally, investments are structured through holding companies and Mauritius has been extensively used as the preferred route for investments into India. Those investments that are routed through tax treaties and that have a sufficient limitation of benefit clause will not be tested under GAAR.

Via Debt Structures

Negotiations to amend the Mauritius-India DTAA finally came to an end last May, when officials of both governments signed what is now termed “the protocol’’. India made sure that it signed the amendments with Mauritius first; to make sure that others follow suit or are left drifted as GAAR which came into force 1 April 2017.

After Mauritius, Cyprus was next (November 2016), and on the last day of 2016, it was Singapore. With these three countries counting for over 60% of FDI into India, India had made significant progress on getting taxing rights, whilst encouraging investees to have direct access to the Indian market or through the Gujarat International Finance City (GIF) when and if it gets going. Please note that GIF City is meant for Debt instruments only.

The times when capital gains were taxed in the resident country of the investee at zero percent are long gone. India wants its taxing rights back. Along the same line, it doesn’t want to scare investors away or eat-in into their returns given that the country is also in dire need for capital investments. India rapidly requires finance to upscale its infrastructure and get its GDP growth over 7%.

However, to withhold investors’ confidence again India has played it smart by being keen to include a transition period for both Mauritius and Singapore so as not to deter investors in a time when the USA seems to be back on track, at least as far as investment returns are concerned.

Both the Mauritius and Singapore transition period is divided into 3 spectra, namely;

up to 31 March 2017 – GAAR should kick in on 1 April 2017

1 April 2017 to 31 March 2019

and after March 2019

Pre 31 March 2017

1 April 2017 and 31 March 2019

Post March 2019

All investments grandfathered

Taxed in India at 50% of the ongoing rate

India takes full taxing

Though, as before in the amended protocol, Mauritius no longer has the ‘preferred nation rule’ clause inserted in the amended treaty. However India has been keen to show its preference by lowering Indian withholding tax on interest to just 7.5% – thus fortifying Mauritius’ supremacy as the jurisdiction of choice, especially for those investing in debt portfolio.

India –

Mauritius

Cyprus

Singapore

Netherlands

Withholding tax on interest on debt claims/loans after amendments

7.5%

10%

10%

10%

How Does Mauritius Compare to Other jurisdictions?

Though Mauritius might not be better placed when compared to the main ‘onshore’ jurisdictions that have a DTAA with India, one point that should also be taken onboard is the rate of Domestic tax applied in those countries. The aim of a DTAA is to avoid double taxation, that is a company should not be taxable where the underlying assets are situated and also in its country of residence. DTAAs are termed in such a way that the entity is only taxable in its country of residence.

The domestic tax rate in Mauritius is 15%. However, global business companies benefit from a deemed foreign credit of 80%, making the effective tax rate a maximum of 3%. This seems to favour shareholders returns, as opposed to other countries which might still exempt entities of capital gains (as stipulated in their DTAA with India) but are taxed at a much higher rate domestically.

DTAA between India and…

Capital Gains

Interest

Equity Shares

Derivatives / Debts

Withholding rate

Mauritius

Taxable

Exempt

7.5%

Belgium

Exempt

Exempt

15%

Cyprus

Taxable

Exempt

10%

France

Exempt

Exempt

10%

Ireland

Taxable

Exempt

10%

Korea

Exempt

Exempt

15%

Luxembourg

Taxable

Exempt

10%

Netherlands

Exempt

Exempt

10%

Singapore

Taxable

Exempt

15%

Switzerland

Taxable

Exempt

10%

During a 2015 visit to Mauritius, Prime Minister Modi raised the question of treaty re-negotiation. The prime minister indicated that the DTA was going to be changed but he also committed that the Mauritius interests would not harmed in any way. This new protocol shows that Mauritius does indeed have an edge over India’s other treaty partners especially with respect to the interest provisions.

Conclusion

All Treaties are prone to readjustments from time to time, and the Mauritius-Indian treaty was due a facelift. The new regulations may not be ideal but Mauritius remains a very competitive jurisdiction for Indian investments for the following reasons:

Mauritius has a historical association with India which forms the basis of an exceptionally good relationship between the countries and investors will continue to benefit from that

Mauritius has over 25 years of working experience in the Indian market

Mauritius is ideally positioned midway between Europe and India, enabling good communication among the parties within any business day

Mauritius remains a very cost effective jurisdiction with a highly qualified workforce now trained to deal with quite a foreign Indian market